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International Journal of Not -for -Profit Law / vol. 18, no. 1 , February 2016 / 65
Article
The New York Nonprofit Revitalization Act, from the Foundation of the Sarbanes-Oxley Act to Implementation
Introduction
Nonprofit organizations play a critical role by acting as a vessel to provide funding for
projects that benefit society. 1 Services and grants in a wide variety of areas are important to
institutions in the community, including healthcare, education, museums, and social -need
organizations. The nonprofit sector has grown in size and diversity and has increased in
prominence. More than 1.5 million nonprofit organizations are registered in the United States. 2
More than 92,906 of these nonprofits are active in New York, 3 of which 74,269 are listed as
501(c) (3) nonprofit organizations. This non -exhaustive list includes public charities, private
foundations, and other types of nonprofit organizations, including chambers of commerce,
fraternal organizations, and civic leagues.
In the wake of news of scandals in nonprofit organizations, several states began to tout
legislative solutions to the perceived notion of a nonprofit accountability gap. These legislative
approaches followed the passing of the Sarbanes -Oxley Act of 2002 ( “SOX”). The steps taken
by the boards of for-profit organizations, including those required by Sarbanes -Oxley and related
rules and regulations, have led to increased engagement on the part of board of directors. 4
Stricter modifications of federal and state law regarding for-profit corporations have also
been implemented. The new regulations for nonprofit corporations are not far disconnected from
SOX regulations that were the foundation for their creation. More interesting, however, is the
substantive link between these two sets of reforms, particularly the shared emphasis on the board
of directors and fiduciary duties.
* Isida Tushe is a student at Hofstra University School of Law.
1 Mark Sidel, The Nonprofit Sector and the New State Activism, 100 Mich. L. Rev. 13 12, 1313 (2002)
(book review) [hereinafter Sidel, New State Activism ] (stating that the charitable sector is “‘integral to the national
economy and a valued part of [our] social fabric . . . . [It] embodies the philanthropic goodness, conviviality, cultural
excitement, and democratic spirit of the American people . . . [and] has provided a valued social location in which
groups can operate without pecuniary obsessions and with measures of success that are not necessarily related to
financial profitability.” (quoting NORMAN I. SILBER, A CORPORATE FORM OF FREEDOM: THE EMERGENCE OF THE
NONPROFIT SECTOR 2 (2001))).
2 National Center for Charitable Statistics (NCCS).
3 Id., refer to state profile and pull up New York.
4 Deloitte, The Guide to Not -For -Profit Governance 2012.
Officers and directors are considered fiduciaries of the
nonprofit organization that they manage. 5 The fiduciary duties of the board of directors are
articulated in the Nonprofit Corporation Law (“NPCL”) of New York.
This article argues that IRS regulatory influence through the Sarbanes-Oxley Act has
influenced the strong, ethical, and transparent nonprofit board governance as implemented in the
New York Nonprofit Revitalization Act (“Revitalization Act”). Part I examines how the New
York government first mimicked SOX by using it as a foundation for the NP CL to regulate
nonprofits. This section further compares the Revitalization Act and the SOX. Part II charts the
evolution of the NP CL until it emerged, renamed the New York Nonprofit Revitalization Act.
Part III gives recommendations to build on the existing reforms in the nonprofit sector.
I. Regulations of Nonprofits
A. Federal Regulations : IRS
Nonprofit law combines corporate law, tax law, and trust law. 6 The law regulating
nonprofit organizations is relatively new compared to the law regulating for-profit corporations .7
Ordinarily, a nonprofit is incorporated under a nonprofit corporation statute. Incorporation is not
required to operate as a nonprofit; however, incorporating is wise when seeking favorable tax
treatment under the Internal Revenue Code. 8 The IRS prohibits acts of self -inurement and self –
dealing for tax-exempt organization s. IRC §501(c)(3) requires that the organization be operated
exclusively for tax-exempt purposes and that “no part of [its] net earnings . . . inures to the
benefit of any private shareholder or individual . . . .”
The role of the board of directors for nonprofits began to be addressed in IRS filings
starting in 2008, 9 which placed an increased focus on the scope of the obligations of nonprofit
directors. 10 In 2007, the IRS released Form 990 that requires disclosures on corporate
governance and board of directors, making the nonprofit’s governance a matter of public record.
A nonprofit in Form 990 must indicate whether the governing board reviewed the form
before it was filed with the IRS 11 and must verify that the form was actually presented to the
board prior to the IRS filing. 12
5 Scheuer Family Foundation, Inc. v. 61 Associates, 179 A.D. 2d 65, N.Y.S.2d 662 (1st Dept. 1992); The
Martha Graham School and Dance Foundation, Inc. v. Martha Graham Center of Contemporary Dance, 224 F. Supp.
2d 567 (S.D.N.Y. 2002), aff’d in part, rev’d in part on other grounds, 380 F. 3d 624 (2d Cir. 2004).
6 Susan N. Gary. Regulating the Management of Charities: Trust Law Corporate Law, and Tax law, 21 U.
Haw. L. Rev. 593 (1999) (discussing how trust law, corporate law, and tax law impact charities).
7 Kara A. Gilmore, House Bill 1095: The New Nonprofit Corporation Law for Missouri, 63 UMKC L. Rev.
633, 633 (1995) (“Nationally, nonprofit corporations have not received as much attention from lawmakers as for –
profit corporations because the former do not impact the economic status of Americans as directly as for -profit
corporations.”).
8 David S. Walker, A Consideration of an LLC for a 501(c)(3) Nonprofit Organization, 38 Wm. Mitchell L.
Rev. 627 (2012) (“While the charitable trust form is an option and, for some, the unincorporated nonprofit
association may be a viable choice, the ‘predominant’ form of charitable organization in the United States is the
nonprofit corporation.”).
9 Karen Donnelly, Good Governance: Has the IRS Usurped the Business Judgment of Tax -Exempt
Organizations in the Name of Transparency and Accountability?, 79 UMKC L. Rev. 163, 165 -68, 181 -91 (2010).
10 Grace Allison, The New Form 990 for Tax Exempt Organizations: Revolution in Progress, 37 Est.
Plan.14, 14 -20 (2010) (discussing the enhanced Form 990 requirements and their effects on directors at nonprofits).
11 I.R.C. Form 990, at 6, Question 11 (2011).
12 Id.
It further requires inclusion of a full description of the process for
review by any of the organization’s officers, directors, trustees, or management and disclosure of
whether it was reviewed before or after it was filed with the IR S, which includes disclosure of
who conducted the review, when it was conducted, and the extent of the review.
Other questions in Form 990 ask the nonprofit to address governance practices in setting
executive compensation and disclosure of the number of independent voting members in the
governing body. 13 Also, the nonprofit must indicate whether its officers, directors or trustees, and
key employees are required to annually disclose any personal interests that could give rise to
conflicts. 14 Additionally, Form 990 must disclose whether the process for determining CEO and
other key officer and employee compensation includes a review and approval by independent
persons, comparability data, and contemporaneous substantiation of the deliberation and decision
for the organization. 15
Section 4958 applies to all organizations exempt under IRC sections 501(c)(3) (other than
private foundations) and 501(c)(4). IRC §4958 proscribes “excess benefit transactions ”16
between certain charitable organizations and “disqualified persons” (generally, those in a
position to exercise “substantial influence” over the organization). Such regulations give the IRS
the authority to impose penalty taxes (known as “intermediate sanctions” in contrast to the
ultimate sanction, revocation of exempt status) when a transaction is found to bestow an excess
benefit on a disqualified person. This legal doctrine was taken into consideration by the New
York legislature for definitional purposes when drafting the Revitalization Act.
B. The Influence of Sarbanes -Oxley
SOX raised corporate governance standards of for-profit corporations. Regulators seized
this opportunity to create similar reforms in nonprofit governance, in order to avoid further
scandals. 17 At the federal level such reforms quickly became moot; in fact the need for
government reforms in nonprofits originated with tax laws rather than traditional corporate
governance sources. 18
SOX was passed in 2002 in the wake of corporate accounting scandals. Two criminal
provisions apply to nonprofit organizations: provisions prohibiting retaliation against
whistleblowers and provisions prohibiting the destruction, alteration, or concealment of certain
documents or the impediment of investigations. 19
13 Dana Brakman Reiser, Director Independence in the Independent Sector, 76 Fordham L. Rev. 795, 814 –
31 (2007).
14 I.R. C. Form 990.
15 Id.
16 An excess benefit transaction is one in which the economic benefit provides to the disqualified person is
greater than the return itself to the applicable tax-exempt organization. IRC §4958(c)(1)(A).
17 Wendy K. Szymanski, The Allegory of Good (and Bad) Governance: Applying the Sarbanes Oxley Act to
Nonprofit Organizations, 2003 Utah L. Rev. 1303, 1320 -36 (2003).
18 Faith Stevelman, Regulatory Competition, Choice of Forum, and Delaware’s Stake in Corporate Law , 34
Del. J. Corp. L. 57, 60 (2009).
19 See American Bar Association, Standing Committee on Pro Bono & Public Service and the Center for
Pro Bono. Nonprofits and Sarbanes -Oxley, https://americanbar. org/legalservices/probono/nonprofits_sarbanes –
oxley.html .
These two criminal provisions will not be
discussed in this article. Instead this article focuses on the provisions of the board of directors,
audit committee requirements, and auditor provisions of the SOX and how the revised
amendments of the NPCL have made their way into the Revitalization Act, with definitional
language changes and structural shifts.
Board of Directors Requirements
With the implementation of SOX, the focus shifted toward a perspective that
management is working for the board of directors. Previously, it was common practice for the
board of directors to act in service of the management. SOX further recognizes that director
independence is necessary for the board to serve effectively as a check on management. SOX
allows director liability if the board fails to exercise the appropriate oversight. This increased
demand and need for independence has led to greater diversity among the people who serve on
the boards. Furthermore, SOX mandates the creation of an audit committee.
Audit Committee Requirement
SOX requires that the audit committee of a company’s board of directors appoint,
compensate, and oversee the auditor’s work. 20 Additionally, it mandates that each corporation
create and maintain an independent and competent audit committee. 21 This committee remains
apprised of all “critical accounting policies and practices” used by the company’s outside
auditors. 22 It requires that each member of the audit committee be an independent board member,
which the act defines as “a person who holds a voting seat on the board but has no other stake in
the corporation .”23 Further, the audit committee members may not be affiliated with the company
or its subsidiaries, and they may not receive fees from the company beyond their compensation
for serving on the board of directors and the audit committee. 24 The law also encourages
companies to have financial experts on the audit committee by requiring companies to disclose
whether their committees include at least one financial expert and, if not, the reasons why. 25
Auditor Provisions
SOX prohibits auditors from providing certain non-auditing services along with an audit;
it requires the audit committee to pre-authorize the audit and permissible non-audit services
(such as tax services, bookkeeping, actuarial services, management or human resources services,
and legal services); and it requires that all audit committee approvals of non-audit services be
disclosed. 26
20 Sarbanes -Oxley Act §301.
21 Stephen J. McNally & Joseph T. Steuer, Case Study: Can Sarbanes Oxley Hold the Keys to Nonprofit
Governance? , WEBCPA, Feb. 2013, 2006, https://www.webcpa.com/article.cfm?articleid=18822&print=yes .
22 Sarbanes -Oxley Act § 204.
23 Id. § 301(3).
24 Id. §301.
25 Id. §407(A).
26 Id. §202.
It requires that the lead partner of a company’s outside auditing firm be rotated off
the company’s audit committee every five years 27 and prohibits an auditor from providing audit
service to a company if the auditor employed the company’s CEO, CFO, Chief Accounting
Officer, or controller and such individual participated in any way in the audit of the company
within one year before the initiation of the audit .28 This provision is meant to minimize risk of
collusion between the company and the auditor. 29 Third, SOX mandates that a top corporate
officer certify the accuracy of the company’s financial statements and holds this officer
personally liable for fraudulent claims in these disclosures. 30 These provisions have given the
audit committee greater powers and more responsibilities. Essentially, if the audit committee of
the board does not address reports of misconduct from independent auditors, the independent
auditors have the obligation to inform the SEC. This creates a check -and -balances system. It
mandates increased communication between the audit committee and the auditor, placing
responsibility for all aspects of the audit with the audit committee while enabling the auditor to
act without any conflict of interest. 31
SOX does not address “related party transactions” under the same microscopic view as
the Revitalization Act does. In fact no such section exist s. However, SOX does require both the
board and the audit committees to review their existing codes of conduct or conflict of interest
policies with particular focus on practices concerning related -party transactions. When dealing
with related transactions, the audit committee may take an expansive view of what is considered
a “related party” and focus on non-arm’s length transactions in addition to relationships required
to be disclosed by the SEC.
II. Not -for -Profit -Corporation Law in New York
New York Attorney General Andrew Cuomo continued the initiative to enact a nonprofit
law that the previous attorney general, Eliot Spitzer, had begun. In 2010, two new governance
rules amended New York’s version of the Uniform Prudent Management of Institutional Funds
Act, requiring (a) that organizations have a written investment policy and (b) that boards
document the prudence analysis accompanying decisions to draw funds – even to appropriate the
annual draw – from endowment. 32 On September 17, 20 10, New York governor David Paterson
signed into law the New York Prudent Management of Institutional Funds Act (“NYPMIFA”). 33
A year later, Attorney General Eric Schneiderman convened the Leadership Committee for
Nonprofit Revitalization, which ultimately developed the New York N PC L and then later
amended it to what is now the New York Nonprofit Revitalization Act (“Revitalization Act”).
27 Id. § 203. (“It shall be unlawful for a registered public accounting firm to provide audit services to an
issuer if the lead (or coordinating) audit partner . . . has performed audit services for that issuer in each of the 5
previous fiscal years of that issuer.”)
28 Id. §206.
29 BoardSource & Indep. Sector, The Sarbanes -Ox ley Act and Implications for Nonprofit Organizations 5
(2003), available at https://www.boardsource.org/clientfiles/SarbanesOxley.pdf .
30 Sarbanes -Oxley Act § 906(c).
31 Daniel L. Kurtz, Nonprofit Governance (2003).
32 New York Revitalizes: State Governance Reform for Nonprofits.
33 New York Prudent Management of Institutional Funds Act, Ch. 490 § 1, 2010 N.Y. Laws 1334.
The Revitalization Act, passed in December 2013, took effect on July 1, 2014. It
amended the NPCL and related laws affecting nonprofit organizations. The Act makes several
changes to the laws governing New York nonprofits in an attempt to shore up board
independence, improve accountability, and modernize outdated provisions. These new provisions
apply to nonprofits that are incorporated in New York, but one significant section – related to
financial audits and financial reporting to the state — applies to all nonprofits that are required to
register in New York for charitable solicitation purposes. The focus of this article is those
provisions dealing with independent governance, audit, and oversight. Under the NPCL, a
nonprofit may have standing and special committees of the board in addition to committees of
the corporation. 34 The Revitalization Act eliminates the concept of standing and special
committees and clarifies that committees include committees of the board and committees of the
corporation.
Audit Committee and Audits
Following the lead of the SOX and the IRS rules, the Revitalization Act places a great
deal of focus on ensuring the independence and objectivity of the board and its directors. For
example, an employee can no longer serve as the chair of the board or hold a position with
similar responsibilities. This provision makes it illegal for one person to lead the administration
of an organization and its governance. The responsibility must be divided between multiple
parties who work in tandem. This minimizes collusion by separating powers. One party can
provide information regarding the many facets of the nonprofit to help the board understand the
situation but is unable to affect the discussion or the vote of the board’s decision.
The Revitalization Act requires a nonprofit organization to have at least two types of
committees: (a) committees of the board, which are made up solely of board directors, and (b)
committees of the organization, which can contain a mix of directors and non -directors. Only
committees of the board can bind the organization. Additionally, the Revitalization Act requires
that the directors be independent and not have significant financial involvement in the
organization.
The Revitalization Act also increases the threshold amounts for requiring a CPA audit.
Under the Act, a nonprofit corporation with annual revenue in excess of $500,000 must establish
an audit committee composed solely of independent directors, 35 or, alternatively, have the
independent directors of the board serve the functions of an audit committee. The audit
committee or independent directors are required to oversee the accounting and financial
reporting processes of the entity as well as the annual audit of the entity’s financial statements,
including by retaining an independent auditor to conduct the audit and reviewing the audit results
with the auditor.
34 Non -Profit Revitalization Act, 2013 §712.
35 “Independent director” is defined in Section 102(a)(21) as a Director who: (1) is not, and has not been
within the last three years, an employee of the corporation or an affiliate of the corporation, and does not have a
relative who is, or has been within the last three years, a key employee of the corporation or an affiliate of the
corporation; (ii) has not received, and does not have a relative who has received, in any of the last three fiscal years,
more than $10,000 in direct compensation from the corporation or an affiliate of the corporation (other than
reimbursement for expenses reasonably incurred as a director or reasonable compensation for service as a director as
permitted by paragraph (A) of Section 202(general and special powers)); and (iii) is not a current employee of or has
a substantial financial interest in, any entity that has made payments to, or received payments from, the corporation
or an affiliate of the corporation for property or services in an amount which, in any of the last three fiscal years,
exceeds the lesser of $25,000 or 2% of such entity’s consolidated gross revenues. For purposes of this subparagraph,
“payment” does not include charitable contributions.
These additional review requirements of the audit committee apply to
corporations with annual revenue greater than $1,000,000 in the prior fiscal year. It is worth
noting that there is no requirement that all directors be considered “independent” – rather, the
focus should be on ensuring that certain governance functions, such as audit oversight, are within
the exclusive control of independent directors. 36
Additionally, the Revitalization Act relaxes certain audit-related thresholds related to
financial reporting with the Attorney General for nonprofits. Corporations receiving gross
revenue and support greater than $500,000 in a fiscal year will be required to file an annual fiscal
report and an audit report prepared by an independent CPA with the Attorney General .37
Corporations receiving gross revenue and support greater than $250,000 but less than $500,000
in a fiscal year will be required to file with the Attorney General an annual financial report and a
review report prepared by an independent CPA. Corporations receiving gross revenue and
support less than $250,000 in a fiscal year will be required only to file an audited financial report
with the Attorney General. 38
These new requirements raise the threshold requirements for the filings. They benefit the
organization with revenue of $100,000 to $250,000, because it is relieved of a review or audit
done by an outside CPA. The filing requirement was burdensome to smaller nonprofits, and the
increased thresholds make it easier for smaller nonprofits to comply. However, audits are a key
step in avoiding mishaps. It was through an audit that the missing funds were uncovered in the
case of the former financial director for a New York Chapter of the American Red Cross. 39 In the
case of H.O.W. Foundation, 40 the former executive director wrote himself 213 unauthorized
checks for a total of more than $1.35 million and embezzled more than $200,000 from a thrift
store operated by the nonprofit over eight years.
The Revitalization Act defines an “independent director” as one who is not, and who has
not been within the last three years, an employee of the corporation or an affiliate of the
corporation, and who does not have a relative who is, or who has been within the last three years,
a key employee of the corporation or an affiliate of the corporation. 41 However, the nonprofit is
given leeway by allowing the independent director to receive no more than $10,000 as direct
compensation, or a financial interest in an entity that adds up to no more than $25,000 or 2
percent of the corporation’s gross revenue for property or services (whichever is less). 42
36 Id.
37 This threshold will increase to $750,000 in 2017 and $1,000,000 in 2021.
38 Revitalization Act Section 102.
39 In 2013, the former financial director for New York Red Cross Chapter was sentenced to two to seven
years in prison for grand larceny. As signatory of the chapter’s operating account, she obtained an ATM debit card
in her name that was linked to the chapter’s account to make cash withdrawals, as often as every few days in some
instances. She used the money to pay for clothing, her children’s tuition, and other personal expenses, embezzling
over $274,000 between 2005 and 2009.
40 A nonprofit alcohol and drug treatment center in Tulsa, Oklahoma.
41 New York Nonprofit Revitalization Act Section 102(a)(21)(11) .
42 New York Legislature Passes Nonprofit Revitalization Act: Comprehensive, Significant Changes to New
York Nonprofit Corporation Law on Horizon, Journal of Multistate Taxation and Incentives, March/April 2014.
The definition is controversial in that not only is it unique among states but it is also found nowhere
else in New York nonprofit law or in IRS rules. It is similar to a question on Form 990 43 but the
definition differs. The term affiliate means entity controlled by, in control of, or under common
control with corporation. The term “control” remains undefined under the IRS Form 990 and the
Revitalization Act. This is a high bar because it makes it difficult to find independent directors.
Also, “substantial financial interest ” remains undefined in the Revitalization Act. The
question arises as to whether this means a senior manager or someone with an ownership
interest. Say, for example, that a member of the board of directors of a theater company buys a
ticket to one of the group’s performances with his own money. Does he need to disclose the
material facts about the ticket purchase, even though he paid the same price as the general
public? In the case of a hospital board and a director whose relative is a private pay patient or has
high-deductible insurance plan, does the hospital board need to pre-approve emergency medical
treatment? If the related party has “substantial financial interest,” then “alternative transactions
to extent available” must also be considered, but this is not defined, so it raises questions such as
whether it is a de facto bidding requirement. Are a certain number of bids required? Must they be
in writing? Is publicizing required? These questions remain unanswered.
Furthermore, Section 102(a)(2 1)(ii) of the independent director definition makes note of
relatives. This is identical to the IRS definition under the Excess Benefit Doctrine .44
Related Party Transactions
The Revitalization Act revised NPCL § 715 and increased the approval and oversight
powers of the board of directors for transactions involving “related parties.” 45 It replaced a
provision governing transactions of “interested directors and officers” with a new provision
regarding “Related Party Transactions,” which are defined as transactions between the
organization or any of its affiliates and a related party who has a financial interest in the
transaction. 46 This term is now more specific. Directors and trustees may not enter into the
transaction unless the transaction meet s the standard “fair, reasonable and in the corporation’s
best interest at the time of such determination.” 47 Further, any director, officer, or “key
employee” who has an interest in a related party transaction must disclose in good faith to the
board, or an authorized committee, the material facts concerning the interest.
In the evaluation process, the Board of Directors must (i) consider alternative transactions
to the extent possible; (ii) approve the transaction by a majority vote of directors present at the
meeting ; and (iii) document the approval by the Board of Directors, including any discussion
regarding alternative proposals.
43 Form 990 possess four questions to determine the “independent” factor: (a) Were you compensated as an
officer or other employee from this or a related organization?; (b) Did you receive total compensation or other
payments exceeding $10,000 for the year from this or a related organization as an independent contractor?; (c) Did
you receive, directly or indirectly, material financial benefits from this or a related organization?; (d) did you have a
family member that received compensation or other material financial benefits from this or a related organization?
44 This was in response to an amendment to IRS in the 1990s that enacted new standards for evaluating
compensation, mainly in nonprofits listed as 501(c)(3) and 501(c)(4)s.
45 “Related party” is defined in Section 102(a)(23) as (i) any director, officer, or key employee of the
corporation; (ii) any relative of a director, officer, or key employee of the corporation; or (iii) any business entity in
which a person described in clauses (i) or (ii) has a 35% or greater ownership stake.
46 Id.
47 NPCL Section 715(a).
International Journal of Not -for -Profit Law / vol. 18, no. 1 , February 2016 / 73
As to what extent related party transactions are intended to
overlap with conflicts of interest, it remains unclear, but it appears that all related party
transactions are likely potential conflicts of interest and that there may be additional conflicts of
interest that are not related party transactions. This requires nonprofit boards to subject such
transactions to careful scrutiny.
In the NPCL, the “financial interest” is applied to any transaction between two
corporations which may have a director or officer in common but in which the director does not
have a financial interest. This provision was dropped in the Revitalization Act, resulting in a
possible conflict of interest. For example, a conflict that wouldn’t be covered would be two
nonprofits collaborating with each other and sharing a director. This is no longer a conflict of
interest on the face of the statute.
At first glance, the “key” employee section might appear to derive directly from the IRS
statute. However, the IRS statute uses the term “person with substantial interest” and not “key
employee .” The IRS regulation encompasses more than employees. The “ownership or beneficial
interest” under Section 102(a)(23)(iii)(ii) is consistent with IRS regulations. This is addressing
persons who have a significant interest in vendors with which nonprofits may be doing business.
Contrary to the SOX, the Revitalization Act does not provide a check and balances
system by requiring both the board and the audit committee to review any related party
transactions; rather, it gives that task to the board of directors or authorized committee. This
requires scrupulous review of transactions. One result of the absence of checks and balances is
the Project Genesis case. 48 On October 12, 2013, the former CFO of Project Genesis, a
Connecticut nonprofit organization that served people with disabilities, was sentenced to 33
months’ imprisonment after embezzling more than $348,000 from the organization over a three –
year period. He stole such funds by keeping terminated employees on the payroll and then
transferring their salaries to his personal bank account. 49
If the board of directors does not follow the prescribed procedures, the Revitalization Act
authorizes the attorney general to bring action to enjoin, void, or rescind the related party
transaction and to seek restitution, to remove directors and officers, or to take other remedial
actions. 50 With respect to these provisions, there is no “de minimis” threshold, and in the case of
willful or intentional misconduct, the attorney general is authorized to require a corporation to
repay double the amount of improperly obtained benefit. 51 This gives the attorney general plenty
to shoot at in challenging transaction s. The power to “void” a transaction may have profound
consequences. It may determine how the power will be administered and how much deference a
judge gives to the board of directors’ statements.
48 FBI Press Release 2012, former CEO of Willimantic Non -Profit Admits Embezzling More than
$348,000.
49 Id.
50 Keith J. Kehrer and Chaeri K. Tornay, New York’s Nonprofit Revitalization Act of 2013 and Its Impact
on Nonprofit Organizations, April 2, 2014.
51 Id.
Violation may go beyond improper benefit to include failure to approve a transaction.
This contracts the IRS excess benefit rules, under which an organization can demonstrate a
transaction is reasonable even if not approved in advance. The IRS rules are structured to
encourage the organization to do everything upfront. If so, the IRS gives deference to that
process or decision. Under the Revitalization Act, the attorney general would have the power to
say that the reasonableness of the transaction does not matter, a departure from federal law.
Furthermore, prior to initial election and at least annually thereafter, each nonprofit
corporation must require directors to sign and submit a written statement identifying those
entities in which they have relationships as officers, director s, owner s, or employee s, and with
which the nonprofit corporation has a relationship. This statement must also include any
transaction in which the nonprofit corporation is a participant if the director may have a conflict
of interest. These statements must be provided to the chair of the audit committee for review
upon completion. The approval process is in parallel to the IRS “excess benefit” rules except for
independent director requirement. Procedures to deal with the IRS regulations will satisfy
Revitalization Act regulations.
III. Recommendations and Conclusions
Organizations in small communities might struggle with finding a sufficient number of
“independent ” directors to serve on the audit committee given the Act’s stringent definition.
However, the limitation is balanced in the Revitalization Act ’s requirement of less scrutiny of
reporting by smaller nonprofits. Regulatory intent seems to be to increase the impartiality and
independence of board members, resulting in less chance of collusion within the organization.
Requiring the use of an independent audit committee by the nonprofit will provide an
effective way to maintain control and objectivity, thus ensuring a foundationally secure financial
process that is able to detect and prevent financial mismanagement. Not specifying a number of
individuals that must be on the board will give leeway for small nonprofits to leverage the board
position by appointing qualified and knowledgeable individuals to oversee the financial aspect of
the organization. Management and board members are often more trusting, which leads to less
stringent financial controls for nonprofits. 52 However, a belief that audits will catch any fraud is
flawed. The Association of Certified Fraud Examiners reports that less than 10 percent of frauds
are discovered as a result of an audit by an independent account firm. 53 Auditors only have a
responsibility to give “reasonable” assurance that no material misstatements in financial
statements have been made. 54 This is a low standard. Therefore, external audits are crucial in
ensuring that effective financial controls and fraud prevention measures are being followed.
The nonprofit sector is self -regulatory. The best way to take full advantage of the
Revitalization Act would be to bifurcate the nonprofit board into a board of directors -managers
responsible for day-to-day management of activities and a supervisory board of advisors charged
with oversight of such management board. The board of directors would owe fiduciary duties to
its members and to beneficiaries but not concern itself with managing the nonprofit organization.
52 William H. Devaney and Jeffrey S. Tenebaum, Preventing Embezzlement and Fraud in Nonprofit
Organization s, May 4, 2011.
53 Id.
54 Id.
This board could serve as the audit committee and report annually to the appropriate authorities.
These advisors cannot be employees of the nonprofit, therefore obeying the Revitalization Act.
The Revitalization Act’s focus is on the independence of directors. Adopting audits and
audit committees is a development out of the SOX that does not take into consideration the
complexity and diversity of the charitable sector, merely the financial revenue of the
organization. The SOX provided a heightened scrutiny environment for audit committees and
outside auditors in the for-profit sector. It made the audit committee directly responsible. This
important characteristic is now in the Revitalization Act, and the audit committee is virtually the
one responsible if accounting and financial processes go wrong.
The nonprofit standards set in the Revitalization Act are tailored toward the business
corporate standard as set forth in the SOX. This shift in the governance of internal matters within
a nonprofit should be salutary. To be sure, applying blanket standard to the actions and
responsibilities of all board members for all nonprofits may be too lenient, because it ignores the
special public purpose carried by nonprofits, the nature of the nonprofit board, and the
inadequacy of internal control and enforcement. This highlights the differences between the
Revitalization Act and SOX. The Revitalization Act considers the size and financial revenue of
the organization, which makes it easier for smaller nonprofits to comply with regulations.
However, the Revitalization Act mandates that the nonprofit organizations fill the positions of
board members and audit committees with individuals academically prepared for these roles
rather than just the individuals with the deepest pockets, inasmuch as those who might be
interested in board membership are often dissuaded out of concerns of liability.
It would be wise to add a clause protecting directors from monetary liability for
unintentional fiduciary duty breaches, as with Delaware businesses and nonprofits. Such a
provision may have been omitted because of the widespread scandals, but it should be
reassessed.
Modeling the requirements pertaining to board of directors, audit committees, and
auditors of the New York Nonprofit Revitalization Act on the Sarbanes -Oxley Act is a proactive
step to reduce the risk of future scandals in the nonprofit sector. The checks -and -balances system
is a step forward to ensure that fraud and corruption do not diminish public trust in nonprofit
organizations. But as we see evidence of how the Revitalization Act affects the nonprofit
industry, the law must continue to evolve.
Chart 1 : Changes in the NPCL amendments to New York Nonprofit Revitalization Act
NPCL Amendments New York Non -Profit Revitalization Act (Current Law)
Governance Requires the board of
directors, board of
trustees, or other
governing body of a
nonprofit corporation
to consist of at least
three individuals.
There continues to be
no cap on the number
of directors who may
serve.
Prohibits an employee of a nonprofit corporation from serving
as the chair of its governing board or holding any other title
with similar responsibilities.
NPCL Amendments New York Non -Profit Revitalization Act (Current Law)
Types of
Committees
Nonprofit may have
standing and special
committees of the
board in addition to
committees of the
corporation.
Nonprofit corporations may establish and maintain two types of
committees: (1) a “committee of the board,” whose members
must be members of the board, which may be delegated powers
of the board and which can exercise authority to bind the
corporation; (2) a “committee of the corporation,” which may
include directors and non -directors. Also dispenses with the
distinction between standing and special committees.
Related –
Party
Transactions
Gave rise to
questions as to
whether any
director or officer
involved was
fulfilling duty of
loyalty to the
organization; such
transactions, if
approved and
entered into, were
valid, binding, and
enforceable against
the organization.
Financial interest
applied to any
transaction between
two corporations
that may have a
director or officer
in common.
The presumption is that a related -party transaction is invalid
and therefore unenforceable unless the organization’s
governing body determines that the transaction is fair,
reasonable, and in the best interest of the organization. A
“related party” is a person who serves as a director, officer, or
key employee of the nonprofit organization or any affiliate
thereof, or is any such person’s relative. “Related party” also
includes any entity in which any of the foregoing individuals
has a 35% or greater ownership or beneficial interest, or, in the
case of a partnership or professional corporation, a director
indirect ownership interest in excess of 5%.
This provision regarding financial interests was dropped
completely.
Audit –
related
thresholds
(gross
revenue)
Requirement s
before July 1, 2014
< $100,000 : no accountant’s report required $100,000 -$250,000 : independent accountant’s review report and financial statements with accompanying notes >$250,000 :
independent
accountant’s audit
report and financial
statements and
accompanying notes.
Requirements through June 30, 2017
NPCL Amendments New York Non -Profit Revitalization Act (Current Law)
Financial
Statements
Responsibility was
divided between
multiple board
members and/or
parties who had to
work in tandem to
achieve success
The board, or a board -designated audit committee composed
only of independent directors, must oversee the accounting and
financial reporting processes of the nonprofit and the auditing of
financial statements. Oversight includes retaining auditors and
reviewing audits, if required, on an annual basis. Attorney
General can require an organization to have its financial
statements audited, even if the organization’s gross revenue is
below the threshold limit. See audit -related thresholds below.
e are tired of tolerating IBIS’ political
interference in Bolivia.” 119
A September 2014 article in the New York Times asserted that foreign “money is
increasingly transforming the once -staid think -tank world into a muscular arm of foreign
governments’ lobbying in Washington.” 120 The following week, United States
Representative Frank Wolf wrote a letter to the Brookings Institution, in which he urged
them to “end this practice of accepting money from … foreign governments” so that its
work is not “compromised by the influence, whether real or perceived, of foreign
governments.” 121
Some governments assert that foreigners are not only seeking to meddle in domestic
political affairs, but also seeking to destabilize the country or otherwise engage in “regime
change.” Accor dingly, they argue that foreign funding restrictions are necessary to thwart efforts
to destabilize or overthrow the government currently in power.
In 2013 in Sri Lanka , the government justified a recent registration requirement for all
CSOs on the grounds that it was necessary to “thwart certain NGOs from hatching
117 Jonathan Lis, “Draft bill: NGOs with foreign funding to be defined ‘foreign agents,’” Haaretz , May 26,
2013, accessed September 8, 2014, https://www.haaretz.com/news/national/.premium -1.592754 .
118 “Some Azerbaijani NGOs Cooperated with Armenian Special Services Under ‘People’s Diplomacy,’”
Trend, August 15, 2014, accessed September 8, 2014, https://en.trend.az/news/politics/230 3147.html .
119 Agence France -Presse, “Bolivia expels Danish NGO for meddling,” Global Post , December 20, 2013,
accessed September 16, 2014, https://www.gl obalpost.com/dispatch/news/afp/131220/bolivia -expels -danish -ngo –
meddling -1.
120 Eric Lipton, Brooke Williams, & Nicholas Confessore, “Foreign Powers Buy Influence at Think Tanks,”
New York Times , September 6, 2014, accessed September 17, 2014,
https://www.nytimes.com/2014/09/07/us/politics/foreign -powers -buy -influence -at-think -tanks.html?_r=0 .
121 Letter from Representative Frank Wolf to Strobe Talbott of the Brookings Institution, September 9,
2014, accessed September 17, 2014, https://s3.amazonaws.com/s3.documentcloud. org/documents/1301186/rep –
frank -wolfs -letter -to-strobe -talbott -at.pdf .
International Journal of Not -for -Profit Law / vol. 17 , no. 1, March 2015 / 23
conspiracies to effect regime change by engaging in politics in the guise of doing social
work.” 122
A drafter of the Russian “foreign agents” law justified the initiative when it was pending
in pa rliament, stating, “There is so much evidence about regime change in Yugoslavia,
now in Libya, Egypt, Tunisia, in Kosovo — that’s what happens in the world, some
governments are working to change regimes in other countries. Russian democracy needs
to be prot ected from outside influences.” 123
In 2005, the Prime Minister of Ethiopia expelled civil society organizations, explaining,
“there is not going to be a ‘Rose Revolution’ or a ‘Green Revolution’ in Ethiopia after the
election” 124 — a reference to the so -called “color revolutions” that had recently occurred
in Georgia and elsewhere.
In June 2012, Uganda’s Minister for Internal Affairs justified the government’s threats to
deregister certain CSOs, stating that CSOs “want to destabilize the country because that
is what they are paid to do…. They are busy stabbing the government in its back yet they
are supposed to do humanitarian work.” 125
In the process of driving civil society organizations out of Zimbabwe , President Mugabe
justified his policies by claiming that the CSOs were fronts for Western “colonial
masters” to undermine the Zimbabwean government. 126 Similarly, the central committee
of Mugabe’s party claimed, “Some of these NGOs are working day and night to remove
President Mugabe and ZANU PF from power. They are being funded by Britain and
some European Union countries, the United States, Australia, Canada and New
Zealand.” 127
In a March 2014 interview justifying a draft “foreign agents” law, Kyrgyzstan’s
President Atembaev argued, “Activities conducted by CSOs are obviously aimed at
destabilization of the situation in the Kyrgyz Republic…. Some CSOs do not care about
how they get income, whose orders to fulfill, which kind of work to execute…. There are
122 Xinhua, “Sri Lanka to Investigate NGOs Operating in Country,” Herald , June 13, 2013, accessed
September 8, 2014, https://www.herald.co.zw/sri -lanka -to-investigate -ngos -operating -in-country/ .
123 “Russian parliament gives first approval to NGO bill,” BBC , July 6, 2012, accessed September 8, 2014,
https://www.bbc.com/news/world -europe -18732949 .
124 Darin Christensen & Jeremy M. Weinstein, “Defunding Dissent,” Journal of Democracy 24(2) (April
2013): 80.
125Pascal Kwesiga, “Govt gets tough on NGOs,” New Vision , June 19, 2012, accessed Septembe r 9, 2014,
https://www.newvision.co.ug/news/632123 -govt -gets -tough -on-ngos.html .
126 Thomas Carothers, “The Backlash Against Democracy Promotion,” Foreign Affairs , March/April 2006,
accessed September 9, 2014, https://www.foreignaffairs.com/articles/61509/thomas -carothers/the -backlash -against –
democracy -promotion .
127 “29 NGOs banned in crackdown,” New Zimbabwe , February 14, 2012, accessed September 9, 2014,
https://www.newzimbabwe.com/news -7189 -29+NGOs+banned+in+crackdown/new s.aspx .
International Journal of Not -for -Profit Law / vol. 17 , no. 1, March 2015 / 24
forces interested in destabilizing the situation in Kyrgyzs tan and spreading chaos across
Central Asia and parts of China.” 128
In July 2014, the vice chairman of the China Research Institute of China -Russia Relations
argued that China should “learn from Russia” and enact a foreign agents law “so as to
block the way for the infiltration of external forces and eliminate the possibilities of a
Color Revolution.” 129
2. Transparency and Accountability
Another justification commonly invoked by governments to regulate and restrict the flow
of foreign funds is the importance of upholding the integrity of CSOs by promoting transparency
and accountability through government regulation. Consider, for example, the following
responses by government delegations to the UNSR’s Resource Report:
Egypt : “We agree with the principles of accountability, transparency, and integrity of the
activities of civil society organisations and NGOs. However, this should not be l imited to
accountability to donors. National mechanisms to follow -up on activities of such entities,
while respecting their independence have to be established and respected.” 130
Maldives : “While civil societies should have access to financing for effective operation
within the human rights framework, it is of equal importance that the organizations must
also ensure that they work with utmost integrity and in an ethical and responsible
manner.” 131
Azerbaijan : “The changes and amendments to the national legisl ation on NGOs have
been made with a view of increasing transparency in this field…. In that regard, these
amendments should only disturb the associations operating in our country on a non –
transparent basis.” 132
Similarly, in response to a United Nations Hum an Rights Council panel on the promotion
and protection of civil society space in March 2014, the following government delegations
responded with justifications invoking transparency and accountability:
128 “Алмазбек Атамбаев: “Хочу максимально успеть,” Slovo.kg , March 23, 2014, accessed September
9, 2014, translated by Aida Rustemova, https://slovo.kg/?p=35019 .
129 Simon Denyer , “China taking the Putin approach to democracy,” Washington Post, October 1, 2014,
A7.
130 UN Office of the High Commissioner for Human Rights, “Clustered ID with the WG on HR and
Transnational Corporations and the SR on The Rights to Freedom of Assembly an d Association: Intervention
delivered by the Permanent Delegation of Egypt,” May 30, 2013, accessed September 9, 2014,
https://extran et.ohchr.org/sites/hrc/HRCSessions/RegularSessions/23rdSession/OralStatements/Egypt_10_1.pdf .
131 UN Office of the High Commissioner for Human Rights, “Interactive Dialogue with the Special
Rapporteur on the Rights to Peaceful Assembly and of Association, M aldives Oral Statement,” May 31, 2013,
accessed September 9, 2014,
https://extranet.ohchr.org/sites/hrc/HRCSessions/RegularSessions/ 23rdSession/OralStatements/Maldives_12.pdf .
132 UN Office of the High Commissioner for Human Rights, “Remarks by Azerbaijan,” May 31, 2013,
accessed September 9, 2014,
https://extranet.ohchr.org/sites/hrc/HRCSessions/RegularSessions/23rdSession/OralStatements/Azerbaijan_12.pdf .
International Journal of Not -for -Profit Law / vol. 17 , no. 1, March 2015 / 25
Ethiopia , on behalf of the African Group: “Domestic l aw regulation consistent with the
international obligations of States should be put in place to ensure that the exercise of the
right to freedom of expression, assembly and association fully respects the rights of
others and ensures the independence, accou ntability and transparency of civil society.” 133
India, on behalf of the “Like Minded Group”: “The advocacy for civil society should be
tempered by the need for responsibility, openness and transparency and accountability of
civil society organizations.” 134
Pa kistan , on behalf of the Organisation of Islamic Cooperation members : “It may be
underscored that securing funding for its crucial work is the right of civil society,
maintaining transparency and necessary regulation of funding is the responsibility of
sta tes.” 135
Kyrgyzstan has also employed this argument to justify a draft “foreign agents” law. The
explanatory note to the draft law claims that it “has been developed for purposes of ensuring
openness, publicity, transparency for non -profit organizations, inc luding units of foreign non –
profit organizations, as well as non -profit organizations acting as foreign agents and receiving
their funds from foreign sources, such as foreign countries, their government agencies,
international and foreign organizations, fo reign citizens, stateless persons or their authorized
representatives, receiving monetary funds or other assets from the said sources.”
3. Aid Effectiveness and Coordination
A global movement has increasingly advocated for greater aid effectiveness, including
through concepts of “host country ownership” and the harmonization of development
assistance. 136 However, some states have interpreted “host country ownership” to be
synonymous with “host government ownership” and have otherwise co -opted the aid
effectivene ss debate to justify constraints on international funding. For example:
133 UN Office of the High Commissioner for Human Rights, “Statement by Ethiopia on behalf of the
African Grou p at the 25th session of the Human Rights Council On the Panel Discussion on the Importance of the
Promotion and Protection of Civil Society Space,” March 11, 2014, accessed September 9, 2014,
https://extranet.ohchr.org/sites/hrc/HRCSessions/RegularSessions/25thSession/OralStatements/Ethiopia%20on%20b
ehalf%20of%20African%20Group_PD_21.pdf .
134 UN Office of the High Commissioner for Human Rights, “Joint Statement: India on behalf of like –
minded countries,” March 11, 2014, accessed September 9, 2014,
https://extranet.ohchr.org/sites/hrc/HRCSessions/RegularSessions/25thSession/OralStatements/India_on%20behalf
%20of%20LMG_PD_21.pdf . The “Like Minded Group” consists of Algeria, Bahrain, Bangladesh, Belarus,
Chi na, Cuba, Egypt, India, Indonesia, Malaysia, Pakistan, Russia, Saudi Arabia, Singapore, South Africa, Sri
Lanka, Sudan, Uganda, United Arab Emirates, Vietnam , and Zimbabwe .
135 UN Office of the High Commissioner for Human Rights, “Statement by Pakistan on be half of OIC:
Panel Discussion on Civil Society Space,” March 11, 2014, accessed September 9, 2014,
https ://extranet.ohchr.org/sites/hrc/HRCSessions/RegularSessions/25thSession/OralStatements/Pakistan%20on%20b
ehalf%20of%20OIC_PD_21.pdf .
136 See the Aid Effectiveness Agenda of the Paris Declaration (2005), the Accra Agenda for Action (2008),
and the Busan Partn ership for Effective Development Cooperation (2011).
International Journal of Not -for -Profit Law / vol. 17 , no. 1, March 2015 / 26
In July 2014, Nepal ’s government released a new Development Cooperation Policy 137
that will require development partners to channel all development cooperation through
the Ministry of Fi nance, rather than directly to CSOs. The government argued that this
policy is necessary for aid effectiveness and coordination: “Both the Government and the
development partners are aware of the fact that the effectiveness can only be enhanced if
the owne rship of aid funded projects lies with the recipient government.” 138
Sri Lanka ’s Finance and Planning Ministry issued a public notice in July 2014 requiring
CSOs to receive government approval of international funding. Justifying the
requirement, the Ministry claimed that projects financed with international funding were
“outside t he government budget undermining the national development programmes.” 139
In response to the UNSR’s Resource Report, the representative of Egypt stated, “The
diversification of the venues of international cooperation and assistance to States towards
the fund ing of civil society partners fragments and diverts the already limited resources
available for international assistance. Hence, aid coordination is crucial for aid
effectiveness.” 140
At the recent Africa Leaders Summit, the Foreign Minister of Benin s poke a t a workshop
on closing space for civil society. He asserted that CSOs “don’t think they are
accountable to government but only to development partners. This is a problem.” He said
Benin needs “a regulation to create transparency on resources coming from a broad and
the management of resources,” stating that the space for civil society is “too wide.” 141
The Intelligence Bureau of India released a report in June 2014 claiming that foreign –
funded CSOs stall economic development and negatively impact India’s GDP growth by
2 to 3 percent. 142 The report stated, “a significant number of Indian NGOs, funded by
some donors based in the US, the UK, Germany, the Netherlands and Scandinavian
137 Government of Nepal Ministry of Finance, “Development Cooperation Policy, 2014,” unofficial
translation, accessed September 9, 2014,
https://www.mof.gov.np/uploads/document/file/DCP_English_20140707120230_20140721083326.pdf .
138 Government of Nepal Ministry of Finance, “Development Cooperation Policy, 2014,” unofficial
translation, Article 2.2, acces sed September 9, 2014,
https://www.mof.gov.np/uploads/document/file/DCP_English_20140707120230_20140721083326.pdf .
139 “No foreign funds without approva l: Ministry,” Daily Mirror , July 22, 2014, accessed September 9,
2014, https://www.dailymirror.lk/news/50038 -no -foreign -funds -without -approval -ministry.html .
140 UN Office of the High Commissioner for Human Rights, “Clustered ID with the WG on HR and
Transnational Corporations and the SR on The Rights to Freedom of Assembly and Association: Intervention
delivered by the Permanent Delegation of Egypt,” May 30, 2013, accessed September 9, 2014,
https://extranet.ohchr.org/sites/hrc/HRCSessions/RegularSessions/23rdSession/OralStatements/Egypt_1 0_1.pdf .
141 Personal notes of author.
142 “Foreign -funded NGOs stalling development: IB report,” Times of India , June 12, 2014, accessed
September 9, 2014, https://timesofindia.indiatimes.com/india/Foreign -funded -NGOs -stalling -development -IB –
report/articleshow/36411169.cms .
International Journal of Not -for -Profit Law / vol. 17 , no. 1, March 2015 / 27
countries, have been noticed to be using people centric issues to create an enviro nment
which lends itself to stalling development projects.” 143
4. National Security, Counterterrorism, and Anti -Money Laundering
As discussed above, governments also invoke national security, counterterrorism, and
anti -money laundering policies to justify restr ictions on international funding, including cross –
border philanthropy. For example, the Financial Action Task Force (FATF), an
intergovernmental body that seeks to combat money laundering and terrorist financing, stated:
The ongoing international campaign against terrorist financing has unfortunately
demonstrated however that terrorists and terrorist organisations exploit the NPO
sector to raise and move funds, provide logistical support, encourage terrorist
recruitment or otherwise support terrorist organi sations and operations. This
misuse not only facilitates terrorist activity but also undermines donor confidence
and jeopardises the very integrity of NPOs. Therefore, protecting the NPO sector
from terrorist abuse is both a critical component of the globa l fight against
terrorism and a necessary step to preserve the integrity of NPOs. 144
Governments have leveraged concerns about counterterrorism and money laundering to
justify restricting both the inflow and outflow of philanthropy. For example: 145
The governm ent of Azerbaijan justified amendments relating to the registration of
foreign grants, stating that the purpose of the amendments was, in part, “ to enforce
international obligations of the Republic of Azerbaijan in the area of combating money –
laundering.” 146
143 Rake sh Krishnan Simha, “Why India Should Follow Vladimir Putin’s Lead on NGOs,” Russia & India
Report, June 15, 2014, accessed September 9, 2014,
https://in.rbth.com/blogs/2014/06/15/why_india_should_follow_vladimir_putins_lead_on_ngos_35945.html .
144 Financial Action Task Force, “International Standards on Combating Money Laundering and the
Financing of Terrorism & Proliferation: The FATF Recommendations,” Financial Action Task Force Report, 2013,
54, accessed September 9, 2014,
https://www.fatfgafi.org/media/fa tf/documents/recommendations/pdfs/FATF_Recommendations.pdf . See also
Financial Action Task Force, “Risk of Terrorist Abuse in Non -Profit Organisations,” Financial Action Task Force
Report, June 2014, https://www.fatf -gafi.org/media/fatf/documents/reports/Risk -of-terrorist -abuse -in-non -profit –
organisations.pdf .
145 Constraints by donor governments on the outflow of cross -border donation s, albeit beyond the scope of
this article, similarly present significant barriers to cross -border philanthropy. These states assert that they have an
international responsibility to regulate the outflow of cross -border donations in order to ensure that fu nding destined
for other countries will not support criminal or terrorist activities in those foreign jurisdictions. For more information
about the justifications employed and the implications for civil society, please see: Ben Hayes, “Counter -Terrorism,
‘Policy Laundering’ and the FATF: Legalizing Surveillance, Regulating Civil Society,” Transnational
Institute/Statewatch Report, February 2012, https://www.statewatch.org/analyses/no -171 -fafp -report.pdf .
146 Charity & Security Network, “How the FATF Is Used to Justify Laws That Harm Civil Society,
Freedom of Association and Expression,” Charity & Security Network , May 16, 2013, accessed September 9, 2014,
https://www.charityandsecurity.org/analysis/Restrictive_Laws_How_FATF_Used_to_Justify_Laws_That_Harm_Civ
il_Society .
International Journal of Not -for -Profit Law / vol. 17 , no. 1, March 2015 / 28
The British Virgin Islands (BVI) enacted a law requiring that CSOs with more than five
employees appoint a designated Anti -Money Laundering Compliance Officer. 147 The
law also imposes audit requirements for CSOs that are not required of businesses. These
burdens were justified with explicit reference to FATF’s recommendation on nonprofit
organizations and counterterrorism. 148
In response to the UNSR’s Resource Report, a group of thirteen African states responded,
“It is the responsibility of governments to ensure that the origin and destination of
associations’ funds are not used for terrorist purposes or directed towards activities which
encourage incitement to hatred and violence.” 149
In 2013, a Sri Lankan government representative similarly stated, “While w e agree that
access to resources is important for the vibrant functioning of civil society, we observe
that Mr. Kiai does not seem to adequately take into account the negative impact of lack of
or insufficient regulation of funding of associations on natio nal security and counter –
terrorism.” 150
In a National Security Analysis released in August 2014, Sri Lanka’s Ministry of
Defence claimed that some civil society actors have links with the Liberation Tigers of
Tamil Eelam, a group with “extremist separatist i deology,” and that these CSOs thereby
pose “a major national security threat.” 151 During the same period, the Sri Lankan
government announced that it was drafting a law requiring CSOs to register with the
Ministry of Defence in order to have a bank account and receive international funding.
5. Hybrid Justifications
While these categories and examples represent the types of justifications offered by
governments for restricting foreign funding, in practice, official statements often combine
multiple justifications. A recent example is the statement made at the UN Human Rights Council
by India on behalf of itself and twenty other “like minded” states, including Cuba, Saudi
147 “Non -Profit Organisations,” British Virg in Islands Financial Investigation Agency, accessed September
9, 2014, https://www.bvifia.org/non -profit -organisations .
148 Charity & Security Network, “How the FATF Is Used to Justify Laws That H arm Civil Society,
Freedom of Association and Expression,” May 16, 2013,
https://www.charityandsecurity.org/analysis/Restrictiv e_Laws_How_FATF_Used_to_Justify_Laws_That_Harm_Civ
il_Society
149 UN Office of the High Commissioner for Human Rights, “Oral Statement — Gabon on behalf of the
African Group,” 30 May 2013, accessed September 9, 2014,
https://extranet.ohchr.org/sites/hrc/HRCSessions/RegularSessions/23rdSession/OralStatements/Gabon%20on%20be
half%20ofAG_10_1.pdf .
150 UN Office of the High Co mmissioner for Human Rights, “23rd Session of the HRC Statement by Sri
Lanka —Item 3: Clustered ID with the SR on the rights to peaceful assembly & of association,” May 31, 2013,
accessed September 9, 2014,
https://extranet.ohchr.org/sites/hrc/HRCSessions/RegularSessions/23rdSession/Pages/OralStatement.aspx?MeetingN
umber=12.0&MeetingDat e=Friday,%2031%20May%202013 .
151 Gotabaya Rajapaksa, “Sri Lanka’s National Security,” Ministry of Defence and Urban Development of
Sri Lanka, August 19, 2014, accessed September 9, 2014,
https://www.defence.lk/new.asp?fname=Sri_Lankas_National_Security_20140819_02 .
International Journal of Not -for -Profit Law / vol. 17 , no. 1, March 2015 / 29
Arabia , Belarus, China, and Vietnam ,152 which weaves together a number of different
justifications, including foreign interference, accountability, and national security:
[C]ivil society cannot function effectively and efficiently without defined
limits…. Civil society must also learn to protect its own space by guarding against
machinations of donor groups guided by extreme ideologies laden with hidden
politicized motives, which if allowed could potentially bring disrepute to the civil
society space…. There have also been those civil society organizations, who have
digressed from their original purpose and indulged in the pursuit of donor -driven
agendas. It is important to ensure accountability and responsibility for their
actions and the consequences thereof and also guard against compromising
national and international security. 153
Similarly, Ethiopia, in its statement in response to the UNSR’s Resource R eport,
referenced justifications relating to state sovereignty, aid coordination, and accountability and
transparency:
It is our firm belief that associations will play their role in the overall
development of the country and advance their objectives, if a nd only if an
environment for the growth of transparent, members based and members driven
civil society groups in Ethiopia providing for accountability and predictability is
put in place. We are concerned that the abovementioned assertion [about
lightening the burdens to receive donor funding] by the special rapporteur
undermines the principle of sovereignty which we have always been guided by. 154
Similarly constructed statements have also been put forward by Pakistan and other states. 155
152 The “Like Minded Group” consisted of Algeria, Bahrain, Bangladesh, Belarus, China, Cuba, Egypt,
India, Indonesia, Malaysia, Pakistan, Russia, Saudi Arabia, Singapore, South Africa, Sri Lanka, Sudan, Uganda,
UAE, Vietnam, and Zimbabwe. UN Office of the Hig h Commissioner for Human Rights, “Joint Statement: India on
behalf of like -minded countries,” March 11, 2014, accessed September 9, 2014,
https://extranet.ohchr.org/sites/hrc/HRCSessions/RegularSessions/25thSession/OralStatements/India_on%20behalf
%20of%20LMG_PD_21.pdf .
153 Ibid.
154 UN Office of the High Commissioner for Human Rights, “Oral Statement: Ethiopia,” May 31, 2013,
accessed September 9, 2014,
https://extranet.ohchr.org/sites/hrc/HRCSessions/RegularSessions/23rdSession/OralStatements/Et hiopia_12.pdf .
155 See, e.g., UN Office of the High Commissioner for Human Rights, “Statement by Pakistan on Behalf of
OIC: Panel Discussion on Civil Society Space,” March 11, 2014, accessed September 9, 2014,
https://extranet.ohchr.org/sites/hrc/HRCSessions/RegularSessions/25thSession/OralStatements/Pakistan%20on%20b
ehalf%20of%20OIC_PD_21.pdf : “By virtue of its dynamic role civil society is well poised to build convergences
with the view to develop synergies between state institutions and their own networks. These synergies would
facilitate proper utilization of resources at the disposal state institutions an d civil society actors. In this regard, it
may be underscored that securing funding for its crucial work is the right of civil society, maintaining transparency
and necessary regulation of funding is the responsibility of states…. Within this social space, the civil society can
play its optimal role by working in collaboration with state institutions. Better coordination between civil society
actors and state institution [sic] would also facilitate enhancement of international cooperation in the field of hu man
rights.”
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In this section, the a rticle briefly surveyed justifications presented by governments to
constrain the inflow of international funding, including philanthropy. In the following section,
we analyze constraints and their justifications under international law.
International Legal Framework
1. International Norms Protecting Access to Resources and Cross -Border Philanthropy
Article 22 of the International Covenant on Civil and Political Rights (ICCPR) states,
“Everyone shall have the right to freedom of association with others….” 156 Acco rding to the
UNSR: 157
The right to freedom of association not only includes the ability of individuals or legal
entities to form and join an association 158 but also to seek, receive and use resources 159 —
human, material and financial — from domestic, foreign and in ternational sources. 160
The United Nations Declaration on Human Rights Defenders 161 similarly states that
access to resources is a self -standing right:
“[E]veryone has the right, individually and in association with others, to solicit, receive
and utilize reso urces for the express purpose of promoting and protecting human rights
and fundamental freedoms through peaceful means….” 162
According to the Office of the United Nations High Commissioner for Human Rights, this right
specifically encompasses “the receipt of funds from abroad.” 163
156 United Nations International Covenant on Civil and Political Rights, Article 22, December 16, 1966,
https://www.ohchr.org/en/professionalinterest/pages/ccpr.aspx .
157 While reports of the UNSR are not binding international law, his reports are referenced here because
they provide a comprehensive articulation and explanation of international law.
158 International law generally recognizes the freedom of association, and t his section follows that
formulation. Addressing the applicability of international law to non -membership organizations is beyond the scope
of this article, but for more information, please see: International Center for Not -for -Profit Law & World Movement
for Democracy Secretariat, “Defending Civil Society Report, Second Edition,” June 2012, 35,
https://www.icnl.org/research/resources/dcs/DCS_Report_Second_Editi on_English.pdf .
159 The UNSR defines “resources” as a broad concept that includes financial transfers (e.g., donations,
grants, contracts, sponsorship, and social investments), loan guarantees, in -kind donations, and other forms of
support. See United Nation s Human Rights Council, Report of the Special Rapporteur on the rights to freedom of
peaceful assembly and of association, Maina Kiai, para. 10, UN Doc. A/HRC/23/39 (April 24, 2013) at
https://freeassembly.net/wp -content/uploads/2013/04/A.HRC_.23.39_EN -funding -report -April -2013.pdf .
160 Ibid., para. 8.
161 The UNSR notes that while “the Declaration is not a binding instrument, it must be recalled tha t it was
adopted by consensus of the General Assembly and contains a series of principles and rights that are based on
human rights standards enshrined in other international instruments which are legally binding. Ibid., para. 17.
162 United Nations General Assembly, Declaration on the Right and Responsibility of Individuals, Groups
and Organs of Society to Promote and Protect Universally Recognized Human Rights and Fundamental Freedoms ,
UN Res. 53/144, Article 13, https://www.un.org/Docs/asp/ws.asp?m=A/RES/53/144 .
163 United Nations Office of the High Commissioner for Human Rights, “Declaration on Human Rights
Defenders,” UN OHCHR, accessed September 9, 2014,
https://www.ohchr.org/EN/Issues/SRHRDefenders/Pages/Declaration.aspx .
International Journal of Not -for -Profit Law / vol. 17 , no. 1, March 2015 / 31
Reinforcing this position, 164 in 2013 the United Nations Human Rights Council passed
resolution 22/6, which calls upon on States “[t]o ensure that they do not discriminatorily impose
restrictions on potential sources of funding aimed at supporting the work of human rights
defenders,” and “no law should criminalize or delegitimize activities in defence of human rights
on account of the origin of funding thereto.” 165
The freedom to access resources extends beyond human rights defenders. For example,
the Declaration on the Elimination of A ll Forms of Intolerance and of Discrimination Based on
Religion or Belief states that the right to freedom of thought, conscience, and religion includes
the freedom to “solicit and receive voluntary financial and other contributions from individuals
and in stitutions.” 166 Access to resources is also an integral part of a number of other civil,
cultural, economic, political, and social rights. As the UNSR states: 167
For associations promoting human rights, including economic, social and cultural rights,
or those involved in service delivery (such as disaster relief, health -care provision or
environmental protection), access to resources is important, not only to the existence of
the association itself, but also to the enjoyment of other human rights by those benef itting
from the work of the association. Hence, undue restrictions on resources available to
associations impact the enjoyment of the right to freedom of association and also
undermine civil, cultural, economic, political and social rights as a whole. 168
Acc ordingly, “funding restrictions that impede the ability of associations to pursue their statutory
activities constitute an interference with article 22” of the International Covenant on Civil and
Political Rights. 169
2. Regional and Bilateral Commitments to Pro tect Cross -Border Philanthropy
164 This article briefly examines international norms governing global philanthropy. But it also recogniz es
that there are distinct limits to the impact of international law. For example, there is often an implementation gap
between international norms and country practice. In addition, there are few binding international treaties, such as
the ICCPR, and de tails are often left to “soft law,” such as the reports of the UNSR. At the same time, there is
concern that any effort to create a new global treaty on cross -border philanthropy or foreign funding would lead to a
retrenchment of existing rights.
165 United Nations General Assembly, Protecting Human Rights Defenders, March 21, 2013, UN Human
Rights Council, Resolution 22/6, para. 9, https://ap.ohchr.org/documents/dpage_e.aspx?si=A/HRC /RES/22/6 .
166 United Nations General Assembly, Declaration on the Elimination of All Forms of Intolerance and of
Discrimination Based on Religion or Belief , November 25, 1981, UN General Assembly Resolution A/RES/36/55,
Article 6(f), https://www.un.org/documents/ga/res/36/a36r055.htm .
167 In similar fashion, the UN Committee on Economic, Social and Cultural Rights recognized the link
between access to resources and economic, social and cultural rights, when it expressed “deep concern” about an
Egyptian law that “gives the Government control over the right of NGOs to manage their own activities, including
seeking external funding.” See Egypt, ICESCR, E/2001/22 (2000) 38 at paras. 161, 176,
https://www.bayefsky.com/themes/public_general_concluding -observations.php .
168 United Nations Human Rights Council, Report of the Special Rapporteur on the rights to freedom of
peaceful assembly and of association, Maina Kiai, para. 9, UN Doc. A/HRC/23/39 (April 24, 2013) at
https://freeassembly.net/wp -content/uploa ds/2013/04/A.HRC_.23.39_EN -funding -report -April -2013.pdf .
169 Human Rights Committee, communication No. 1274/2004, Korneenko et al. v. Belarus, Views adopted
on October 31, 2006, para. 7.2.
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While this article is focused on global norms, cross -border philanthropy is also
protected at the regional level. For example:
The Council of Europe Recommendation on the Legal Status of NGOs states:
“NGOs should be free to s olicit and receive funding — cash or in -kind donations —
not only from public bodies in their own state but also from institutional or
individual donors, another state or multilateral agencies ….” 170
According to the Inter -American Commission on Human Rights, “states should allow and
facilitate human rights organizations’ access to foreign funds in the context of
international cooperation, in transparent conditions.” 171
In May 2014, the African Commission on Human and Peoples’ Rights (ACHPR)
adopted, in draft for m, a report of the ACHPR Study Group on Freedom of Association
and Peaceful Assembly, with a specific recommendation that States’ legal regimes should
codify that associations have the right to seek and receive funds. This includes the right to
seek and re ceive funds from their own government, foreign governments, international
organizations and other entities as a part of international cooperation to which civil
society is entitled, to the same extent as governments.
The European Court of Justice (ECJ) has issued a series of important decisions about the
free flow of philanthropic capital within the European Union. 172
In addition, many jurisdictions have concluded bilateral investment treaties, which help
protect the free flow of capital across borders. Some treaties, such as the U.S. treaties with
Kazakhstan and Kyrgyzstan, expressly extend investment treaty protections to organizations not
“organized for pecuniary gain.” 173 Indeed, the letters of transmittal submitted by the White
House to the U.S. Senate sta te that these treaties are drafted to cover “charitable and non -profit
entities.” 174
170 Council of Europe, “Recommendation CM/Rec (2007)145 of the Committ ee of Ministers to member
states on the legal status of non -governmental organisations in Europe,” adopted October 10, 2007, Article 50,
https://wcd.coe.int/ViewDoc.jsp?id=1194609 .
171 Inter -American Commission on Human Rights, Report on the Situation of Human Rights Defenders in
the Americas , March 7, 2006, Recommendation 19, https://www.icnl.org /research/resources/assembly/oas -human –
rights -report.pdf .
172 For more information on these decisions, see: European Foundation Center and Transnational Giving
Europe, “Taxation of Cross -Border Philanthropy in Europe After Persche and Stauffer: From landloc k to free
movement?”, European Foundation Center Report, 2014,
https://www.efc.be/programmes_services/resources/Documents/TGE -web.pdf ; European Foundation Centre, “ECJ
rules in favour of cross -border giving ,” EFC briefing, January 27, 2009, accessed September 9, 2014,
https://www.efc.be/programmes_services/resources/Documents/befc09 08.pdf .
173 U.S. -Kyrgyz Bilateral Investment Treaty, Article 1(b); U.S. -Kazakh Bilateral Investment Treaty, Article
1(b). See also Article 1(2) of the China – Germany BIT: “the term ‘investor’ means … any juridical person as well
as any commercial or other c ompany or association with or without legal personality having its seat in the territory
of the Federal Republic of Germany, irrespective of whether or not its activities are directed at profit.”
174 Letters of Transmittal available at the U.S. State Departm ent website:
https://www.state.gov/documents/organization/43566.pdf and
https://www.state.gov/documents/organization/4 3567.pdf .
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A detailed discussion of investment treaty protection for cross -border philanthropy is
beyond the scope of this article. This issue is presented in brief form, however, beca use it is a
significant avenue for further exploration, as it expands the international legal argument beyond
human rights and implicates bilateral investment treaties with binding enforcement
mechanisms. 175 For further information on this issue, please see International Investment Treaty
Protection of Not -for -Profit Organizations 176 and Protection of U.S. Non -Governmental
Organizations in Egypt under the Egypt -U.S. Bilateral Investment Treaty. 177
3. Restrictions Permitted Under International Law
Continuing the discussion of global norms, ICCPR Article 22(2) recognizes that the
freedom of association can be restricted in certain narrowly defined conditions. According to
Article 22(2):
No restrictions may be placed on the exercise of this right other than those wh ich are
prescribed by law and which are necessary in a democratic society in the interests of
national security or public safety, public order (ordre public), the protection of public
health or morals or the protection of the rights and freedoms of others. 178
In other words, international law allows a government to restrict access to resources if the
restriction is:
(1) prescribed by law;
(2) in pursuance of one or more legitimate aims, specifically:
o national security or public safety;
o public order;
o the protection of public health or morals; or
o the protection of the rights and freedoms of others; and
175 In addition, the European Court of Human Rights has held that Article 1 of the First Protocol of the
European Convention on Human Rights protects the right to peaceful enjoyment of one’s possessions. (Article 1 of
the First Protocol of the Euro pean Convention reads: “Every natural or legal person is entitled to the peaceful
enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to
the conditions provided for by law and by the general p rinciples of international law. The preceding provisions shall
not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of
property in accordance with the general interest or to secure the payment o f taxes or other contributions or
penalties.” In addition, the right to property includes the right to dispose of one’s property (Clare Ovey & Robin
White, The European Convention on Human Rights , 3rd edition (Oxford: Oxford University Press, 2002)), which
would seem to embrace the right to make contributions to CSOs for lawful purposes.
176 Luke Eric Peterson & Nick Gallus, “International Investment Treaty Protection of Not -for -Profit
Organizations,” International Journal of Not -for -Profit Law 10(1) (December 2007),
https://www.icnl.org/research/journal/vol10iss1/art_1.htm .
177 Nick Gallus, “Protection of U.S. Non -Governmental Organizations in Egypt under the Egypt -U.S.
Bilat eral Investment Treaty,” International Journal of Not -for -Profit Law 14(3) (September 2012),
https://www.icnl.org/research/journal/vol14iss3/art2.html .
178 United Nations International Covenant on Civil and Political Rights, Article 22, December 16, 1966,
https://www.ohchr.org/en/professionalinterest/pages/ccpr.aspx . Article 22, ICCPR
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(3) “necessary in a democratic society to achieve those aims.” 179
Moreover :
States should always be guided by the principle that the restrictions must not im pair the
essence of the right … the relations between right and restriction, between norm and
exception, must not be reversed. 180
The burden of proof is on the government. 181 In addition:
When a State party invokes a legitimate ground for restriction of freed om of expression,
it must demonstrate in specific and individualized fashion the precise nature of the threat,
and the necessity and proportionality of the specific action taken, in particular by
establishing a direct and immediate connection between the [ activity at issue] and the
threat. 182
The following section amplifies this three -part test contained in Article 22(2).
A. Prescribed by law
The first prong requires a restriction to have a formal basis in law. This means that:
restrictions on the right to free dom of association are only valid if they had been
introduced by law (through an act of Parliament or an equivalent unwritten norm of
common law), and are not permissible if introduced through Government decrees or other
similar administrative orders. 183
As discussed above, in July 2014, the Sri Lankan Department of External Resources of
the Ministry of Finance and Planning disseminated a notice to the public, declaring that any
organization or individual undertaking a project with foreign aid must have appro val from
relevant government agencies. Similarly, in July 2014, Nepal’s government released a new
Development Cooperation Policy that will require development partners to channel all
development cooperation through the Ministry of Finance, rather than directly to civil society. In
both cases, the restriction s were based on executive action and not “introduced by law (through
179 Case of Vona v. Hungary (A pp no 35943/10) (2013) ECHR para. 50,
https://hudoc.echr.coe.int/sites/eng/pages/search.aspx?i=001 -122183 .
180 United Nations Human Rights Council, Report of the Special Rappo rteur on the rights to freedom of
peaceful assembly and of association, Maina Kiai, para. 16, UN Doc. A/HRC/20/27 (May 21, 2012),
https://www.ohchr .org/Documents/HRBodies/HRCouncil/RegularSession/Session20/A -HRC -20 -27_en.pdf .
181 UN Office of the High Commissioner for Human Rights (OHCHR), Fact Sheet No. 15, Civil and
Political Rights: The Human Rights Committee, May 2005,
https://www.ohchr.org/Documents/Publications/FactSheet15rev.1en.pdf .
182 United Nations Human Rights Committee, General Comment No. 34, para. 35, UN Doc.
CCPR/C/GC/34 (September 12, 2011), https://www2.ohchr.org/english/bodies/hrc/docs/GC34.pdf .
183 See UN Special Rapporteur on the situation of human rights defenders, Commentary to the Declaration
on the Right and Responsibility of Individuals, Groups and Organs of Society to Promote and Protect Universally
Recognized Human Rights and Fundamental Fre edoms, July 2011, 44,
https://www.ohchr.org/Documents/Issues/Defenders/CommentarytoDeclarationondefendersJuly2011.pdf : “It would
seem reasonable t o presume that an interference is only “prescribed by law” if it derives from any duly promulgated
law, regulation, order, or decision of an adjudicative body. By contrast, acts by governmental officials that are ultra
vires would seem not to be ‘prescribe d by law,’ at least if they are invalid as a result.”
International Journal of Not -for -Profit Law / vol. 17 , no. 1, March 2015 / 35
an act of Parliament or an equivalent unwritten norm of common law).” Accordingly, they
appear to violate the “prescribed by law” standard required under Article 22(2) of the ICCPR.
This prong of Article 22(2) also requires that a provision be sufficiently precise for an
individual or NGO to understand whether or not intended conduct would constitute a violation of
law. 184 As stated in the Johannesburg Principles, “The law must be accessible , unambiguous,
drawn narrowly and with precision so as to enable individuals to foresee whether a particular
action is unlawful.” 185
This prong helps limit the scope of permissible restrictions. As discussed above, certain
laws ban funding of organizations that cause “social anxiety,” have a “political nature,” or have
“implied ideological conditions.” These terms are undefined and provide little guidance to
individuals or organizations about prohibited conduct. Since they are not “unambiguous, drawn
narrowl y and with precision so as to enable individuals to foresee whether a particular action is
unlawful,” there is a reasonable argument that these sorts of vague restrictions fail the
“prescribed by law” requirements of international law.
B. Legitimate aim
The second prong of Article 22(2) requires that a restriction advance one or more
“legitimate aims,” 186 namely:
national security or public safety;
public order;
the protection of public health or morals; or
the protection of the rights and freedoms of others.
This prong provides a useful lens to analyze various justifications for constraint. For
example, governments have justified constraints to promote “aid effectiveness.” As the UNSR
notes, aid effectiveness “is not listed as a legitimate ground for restricti ons.” 187 Similarly, “[t]he
protection of State sovereignty is not listed as a legitimate interest in the [ICCPR],” and “States
cannot refer to additional grounds … to restrict the right to freedom of association.” 188
Of course, assertions of national security or public safety may, in certain circumstances,
constitute a legitimate interest. Under the Siracusa Principles, however, assertions of national
security must be construed restrictively “to justify measures limiting certain rights only when
184 Though not a fully precise comparison, this concept is somewhat similar to the “void for vagueness”
doctrine in U.S. constitutional law.
185 Article 19, Johannesburg Principles on National Security, Fre edom of Expression and Access to
Information (London: Article 19, 1996), Principle 1.1(a),
https://www.article19.org/data/files/pdfs/standards/joburgprinciples.pdf . The Johannesburg Principles were
developed by a meeting of international experts at a consultation in South Africa in October 1995.
186 Case of Vona v. Hungary (App no 35943/10) (2013) ECHR para. 50,
https://hudoc.echr.coe.int/sites/eng/pages/search.aspx?i=001 -122183 .
187 United Nations Human Rights Council, Report of the Special Rapporteur on the rights to freedom of
peaceful assembly and of association, Maina Kiai, para. 40, UN Doc . A/HRC/23/39 (April 24, 2013) at
https://freeassembly.net/wp -content/uploads/2013/04/A.HRC_.23.39_EN -funding -report -April -2013.pdf .
188 Ibid., pa ra. 30.
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they are taken to protect the existence of the nation or its territorial integrity or political
independence against force or threat of force.” 189 In addition, a state may not use “ national
security as a justification for measures aimed at suppressing opposition … or at perpetrating
repressive practices against its population.” 190 This includes defaming or stigmatizing foreign
funded groups by accusing them of “treason” or “promoting regime change.” 191
Accordingly, under international law, governments cannot rely on generalized claims of
“state sovereignty” to justify constraints on global philanthropy. In the words of the UNSR:
Affirming that national security is threatened when an association receives funding from
foreign sources is not only spurious and distorted, but also in contradiction with
international human rights law. 192
This brief analysis is not intended to explore the details of the aid effectiveness and
sovereignty justifications. Rather, the goal is to illustrate how the “legitimate aim” requirement
of in ternational law can help inform the analysis of certain justifications presented by
governments, such as arguments based on “aid effectiveness” and “sovereignty.”
C. Necessary in a Democratic Society
Even if a government is able to articulate a legitimate aim , a restriction violates
international law unless it is “necessary in a democratic society.” As stated by the Organization
for Security and Co -operation in Europe, the reference to necessity does not have “the flexibility
of terms such as ‘useful’ or ‘conv enient’: instead, the term means that there must be a ‘pressing
social need’ for the interference.” 193 Specifically, “where such restrictions are made, States must
demonstrate their necessity and only take such measures as are proportionate to the pursuance of
legitimate aims in order to ensure continuous and effective protection of Covenant rights.” 194
As stated by the UNSR:
In order to meet the proportionality and necessity test, restrictive measures must be the
least intrusive means to achieve the desired ob jective and be limited to the associations
189 See the “Siracusa Principles” [United Nations, Economic and Social Council, U.N. Sub -Commission on
Prevention of Discrimination and Protection of Minorities, Siracusa Principles on the Limitation and Derogation of
Provisions in the International Covenant on Civil and Political Rights, Annex, UN Doc E/CN.4/1985/4 (1984)],
which were adopted in May 1984 by a group of international human rights experts convened by the International
Commission of Jurists, the International Association of Penal Law, th e American Association for the International
Commission of Jurists, the Urban Morgan Institute for Human Rights, and the International Institute of Higher
Studies in Criminal Sciences. Though not legally binding, these principles provide an authoritative s ource of
interpretation of the ICCPR with regard to limitations clauses and issue of derogation in a public emergency. They
are available at: https://graduateinstitute.ch/f aculty/clapham/hrdoc/docs/siracusa.html .
190 Ibid.
191 United Nations Human Rights Council, Report of the Special Rapporteur on the rights to freedom of
peaceful assembly and of association, Maina Kiai, para. 27, UN Doc. A/HRC/23/39 (April 24, 2013) at
https://freeassembly.net/wp -content/uploads/2013/04/A.HRC_.23.39_EN -funding -report -April -2013.pdf .
192 Ibid., para. 30
193 OSCE/Office for Democratic Institutions and Human Rights (ODIHR), Key Guiding Principles of
Freedom of Association with an Emphasis on Non -Governmental Organizations , para. 5
194 United Nations Human Rights Committee, General Comment No. 31 (2004), para. 6, UN Doc.
CCPR/C/21/Rev.1/Ad d. 13, May 26, 2004.
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falling within the clearly identified aspects characterizing terrorism only. They must not
target all civil society associations…. 195
Consider, for example, Ethiopian legislation imposing a 10 percent cap on the for eign
funding of all CSOs promoting a variety of objectives, including women’s rights and disability
rights. As discussed above, Ethiopia has asserted a counterterrorism rationale to justify foreign
funding constraints. Ethiopia does not establish a “ direct and immediate connection between the
[activity at issue] and the threat.” 196 In addition, the cap is not the “least intrusive means to
achieve the desired objective and … limited to the associations falling within the clearly
identified aspects characterizi ng terrorism.” Accordingly, the counterterrorism objective fails to
justify the Ethiopian cap on foreign funding.
The UNSR also applied this test to the “aid effectiveness” justification. In response, he
stressed that:
even if the restriction were to purs ue a legitimate objective, it would not comply with the
requirements of “a democratic society.” In particular, deliberate misinterpretations by
Governments of ownership or harmonization principles to require associations to align
themselves with Government s’ priorities contradict one of the most important aspects of
freedom of association, namely that individuals can freely associate for any legal
purpose. 197
In addition, “longstanding jurisprudence asserts that democratic societies only exist
where ‘pluralis m, tolerance and broadmindedness’ are in place,” 198 and “minority or dissenting
views or beliefs are respected.” 199
Applying this test, the UNSR has note